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Apple Smashes Profits Record

Apple has smashed through the record for highest company profits in its latest results. Amazon, eBay and Facebook move higher, but Google disappoints

James Gard 2 February, 2018 | 12:13AM

Apple iPhone X

Global technology company results are among the most hotly anticipated of the US earnings season. UK investors who don't directly own the shares may be forgiven for thinking these results don't affect them, but if you own a global equity fund, an ETF tracking the US stock market or even invest in a workplace pension, chances are, you are a shareholder of Apple, Amazon and Facebook.

Their products are also used by millions of people worldwide on a daily basis, and the company announcements often unveil futuristic new projects. Much press coverage before Facebook’s results, for example, focused on the prospect of the social media giant launching its own cryptocurrency.

Stock market analysts also closely watch tech companies’ earnings as a guide to broader sentiment. The most recent set of quarterly tech results, released in November 2017, smashed forecasts and gave indices like the tech-orientated Nasdaq the impetus to push to new highs towards the end of the year and into 2018.

The results are released in a very concentrated space of time – and usually after the US stock market closes, so any share price reaction often has three stages: the after-market trading, the pre-market trading before the market opens again, and then when traders get the chance to fully react to the news.

What are the Latest Results?

The fourth-quarter results were unveiled with markets in a less ebullient mood than three months ago, so share price reactions to earnings news were more unpredictable: Amazon (AMZN) was generally seen as the winner among the tech giants, and its shares rose nearly 7% in after-market trading to a new record just below $1,500 a share. Google parent company Alphabet (GOOGL) missed forecasts and its A shares slid sharply as soon as the results were announced.

EBay’s (EBAY) results were dominated by news that it will be lessening its dependence on online payments firm Paypal (PYPL), which currently processes around 13% of the auction platform’s transactions. Ending a 15-year partnership, eBay’s shares soared to a new record high, while Paypal’s slumped. The results themselves were less headline-grabbing: full-year revenue was up 7% on 2016 at $9.6 billion, active users were 5% higher, and earnings per share estimates came in line with forecasts.

The company’s shares spiked nearly 15% higher to $46 on the first full day’s trading after the results. Morningstar equity analyst R.J. Hottovy said that, due to changes made to eBay’s Marketplace platform and payment processing that 10-year revenue growth forecasts will be raised, and a 10% uplift to the share’s fair value estimate is likely.

Facebook in the end did not unveil a new cryptocurrency, and its share price gyrated after the results were released on a mixed set of numbers.

On one level the social media giant revealed a $2 billion tax charge from recent reforms and said that users were spending less time on the site after changes to the news feed. However, during the earnings call to analysts the company’s stock price hit a record of $194 as Facebook said its ad prices had risen 43%.

Morningstar analysts raised their fair value estimate for Facebook to $198 a share, a significant jump from the previous level of $163 and $5 above its current price. “We currently view Facebook shares as fairly valued,” says Ali Mogharabi.

Microsoft’s (MSFT) earnings were once again dominated by the success of its cloud venture Azure, whose revenues almost doubled in 2017.

Microsoft has a diversified suite of products, from Xbox gaming to the LinkedIn social network, that has allowed to move away from its Windows and Microsoft Office heritage.

But analysts are always mindful of the threat from Amazon, whose Alexa voice assistant is in direct competition with the Microsoft equivalent. Microsoft’s chief executive Satya Nadella said that the company is working directly with Amazon to incorporate Alexa into Windows 10 computers, tablets and phones. Microsoft also competes directly with Sony in live computer gaming experiences through rival console PlayStation.

“We will welcome it on our own devices,” he said of Alexa.

Microsoft shares have risen on the wave of enthusiasm for the tech sector, climbing from $60 to around $90 in 2017, but the price reaction was more muted after this week’s results.

Equity analysts at Morningstar believe the company has a “wide moat” or strong competitive advantage and raised the company’s fair value from $100 to $106 a share.

“We continue to be impressed by the durable, elevated growth rates the firm is seeing in its cloud properties, and profitability continues to outstrip both management’s prior expectations and our forecasts,” says analyst Rodney Nelson.

Alibaba Raises Growth Forecasts

NYSE-listed Chinese online retailer Alibaba (BABA) has taken its place among the tech companies reporting in the US and is one of “one of the most direct ways to play longer-term Chinese consumption and mobile technology trends”, according to Morningstar analyst R.J.Hottovy.

The retailer has a wide-moat rating and a fair value estimate of $200 a share, above its current trading price.

Stock market investors reacted negatively to news that profit margins had been squeezed by investments in digital and bricks-and-mortar assets. Alibaba’s purchase of a 33% stake in Chinese payments giant Ant Financial also troubled some analysts because of regulatory scrutiny and competition from Hong Kong-listed Tencent. Nevertheless, revenue targets were exceeded and Alibaba raised its growth forecast for the full year. Chief financial officer Maggie Wu said that lower operating margins should not be equated with lower profits.

The biggest three companies by market capitalisation, Amazon, Google and Apple, also unveiled results on Thursday. All three companies are in direct competition with each other for digital reach despite obvious differences in the key offerings of online goods, search and mobile phones.

They are also vying for the crown of the world’s first trillion dollar company.

Amazon was seen to have the edge over its fellow tech giants in this quarter’s earnings season, especially with the success of voice-controlled personal assistant Alexa. After-hours trading saw the shares surge to a new record high as sales grew 38% year on year and earnings per share came in at $3.75, against Wall Street estimates of half that. Fourth quarter revenue was a touch higher than forecasts at just over $60 billion.

Lewis Grant, Senior Portfolio Manager, Global Equities, at Hermes Investment Management said about Netflix (NFLX) and Amazon, which compete on providing film and TV services: “No company is immune from disruption but Amazon’s diversification provides significant protection, whilst Netflix is the leader is one area where it faces numerous challengers, including Amazon.”

Amazon also announced earlier this week that it is moving into the healthcare sector in partnership with Berkshire Hathaway (BRK) and JPMorgan (JPM). Although the move is not expected to affect the company’s fair value, as assigned by Morningstar, “there are layers of potential upside to our longer-term assumptions,” says analyst R.J.Hottovy.

After the results, Hottovy raised the fair value estimate for Amazon to $1,600 a share, up from $1,250. He anticipates that the company will continue to expand into new sales categories that offer new subscription revenue streams. The Morningstar equity analysts' model now assumes 21% average annual revenue growth from 2018 to 2022, 

Apple Close to $1trn Market Cap

Apple (AAPL) also impressed and shares rose in after-hours trading. Revenue and earnings per share beat estimates, though not to the extent that Amazon did, but iPhone sales came in below forecast. The company sold 77 million phones in the last three months of the year, below expectations of 80 million handsets. Market watchers had been concerned by reports in the build-up to the earnings release that Apple was planning to cut production of its $1,000 iPhone X amid weak demand.

The worst fears for iPhone X sales were not realised, but analysts who cover the stock had other concerns, especially a lower forecast for sales for the current quarter from Apple. There is a concern that the iPhone market is approaching “saturation point” and that the launch of the iPhone X did not trigger mass upgrades from lower-spec iPhone customers.

Nevertheless, Apple looks closest to reaching the $1 trillion market cap milestone and remains the world’s biggest company. Morningstar analyst Brian Colello says that in the long-term, two factors weigh in Apple’s favour: “customer lock-in” to Apple hardware and software, and that” there is little evidence that customers are switching away from Apple towards Android-based devices”. The company has a narrow moat, or slender competitive advantage, and its fair value estimate of $163 a share is just below its current trading price.

The company also is sitting on $285 billion in cash, more than half of which it now plans to return to shareholders, which explains the positive share price reaction. Apple is taking a $38 billion tax charge in relation to recent reforms, which is substantially higher than the $13.8 billion charged by Microsoft.

Google parent company Alphabet was one of the laggards in the tech sector’s earnings season with a mixed set of results: earnings per share missed estimates but fourth-quarter revenue was up 24% on the same three months of the previous year. Alphabet has a fair value estimate for its shares of $1,000, against a current price of around $1,181. The shares feel nearly 4% in after-hours trading on lower-than-expected profits and the cost of investment in YouTube to make the video-sharing site more appealing to advertisers.

But the company maintains a wide-moat rating from Morningstar analysts, who say: “Alphabet dominates the online search market with Google’s global share above 80%, via which it generates strong revenue growth and cash flow. We expect continuing growth in the firm’s cash flow as we remain confident that Google will maintain its leadership in the search market. We foresee YouTube gradually contributing more to the firm’s top and bottom lines. Plus, we view investments of some of that cash in moonshots [such as AI and driverless cars] as attractive.”

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
Alibaba Group Holding Ltd ADR183.68 USD-2.01
Alphabet Inc A1,095.55 USD0.38
Alphabet Inc C1,094.70 USD0.48
Amazon.com Inc1,448.07 USD-0.94
Apple Inc172.45 USD-0.31
Berkshire Hathaway Inc A306,000.00 USD0.00
eBay Inc43.34 USD0.77
JPMorgan Chase & Co114.68 USD-0.72
Microsoft Corp92.00 USD-0.71
Netflix Inc278.52 USD-0.62
PayPal Holdings Inc78.37 USD0.10
About Author

James Gard  is subeditor for Morningstar.co.uk